The pip or base point, as already mentioned in previous lessons, is the minimum possible amount of variation of a specific price. We could define it as the unit of measurement, the lowest common denominator in the Forex prices. The pip is made from 0,01% of a percentage point, it would be to say the hundredth of a percentage point. If 1% is a percentage point, a pip is equal to 0.01%. Sorry to be so simple, but we assure you specify it is never trivial but actually very useful.

So, for example, if interest rates on a certain stock rose by 50 pips, the increase has been 0.50% to 0.0050 when you consider the price of the currency. Take for example our dear friend eur / usd. If at 15.00, its value is equal to 1.2800 and 18.00 equal to 1.2832, the increase has been 32 pips. Other names by which they are called the pips are: bp, beeps, basis.

The Pips In Practice

Although the definition of pips is quite simple, what happens in the trading practice is a bit ‘more complicated. Okay, we have seen how to calculate the change in pips between the values of currency pairs, but when trading Forex is necessary to apply the logic of pips to other factors such as capital and margins.

Before proceeding, make sure that you understand and remember what was said in the first part of this article. These are simple concepts, but must make a solid foundation to build our whole path. You are ready? Well, let’s proceed.

Let us consider an example using a starting capital of € 5,000 and a leverage of 1: 200.

We want to focus on the euro and then open a buy position of a lot on EUR / USD with quote 1.1171 / 1.1173.

To purchase a quantity of 10,000 initial margin of 0.50%, so 50. So I will spend only 50 euro to move 10,000.

The capital, therefore, will be available in 5000-50 = 4.950.

If there is a change of 10 pips, I will have to calculate the value of a pip for the EUR / USD (in this case 89 cents) and apply the change. So I will have 10 pips x 89 cents = 8.9 euro. The positive change will have been of 8.9 euro

At this point, if I closed my position 5.0008,9 euro, as the initial margin will be returned to me.

For now, the lesson we finish here, but we refer to lesson 11 to calculate the pip value.